Flawed contract for jobless claim system cost state millions

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A flawed contract negotiated by state officials provided few protections for taxpayers and little oversight of consultants, resulting in a computer system for unemployment claims that arrived years late, millions of dollars over budget, and riddled with technical problems, according to review of contract documents.

The agreement allowed the contractor, Deloitte Consulting of New York, to miss deadlines and still charge the state some $6 million more than originally planned, according to the documents, obtained by the Globe through a public records request. When the new system finally was rolled out July 1 — two years behind schedule — it erroneously cut hundreds of jobless workers from their benefits, and required thousands of overtime hours by state employees to handle the flood of complaints about the system’s many glitches.

“With 20-20 hindsight, we now know this was a poor contract and a lousy deal for the state,” said Michael Krigsman, a software consultant who reviewed the documents at the Globe’s request.

A number of factors in the contract benefited Deloitte, officials acknowledged, especially the lack of financial repercussions if Deloitte failed to finish on time and on budget. The system upgrade, for example, was originally scheduled to be completed by July 5, 2011, but wasn’t ready by then.

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So Deloitte negotiated a new deadline, March 2012, and an additional payment of $4 million to keep its 80 programmers working on the project. Deloitte missed the second deadline, too.

In an interview last week, Joanne F. Goldstein, secretary of the state Executive Office of Labor and Workforce Development, acknowledged that the project went so far off track the state considered firing Deloitte. Instead, she negotiated a contract amendment that for the first time included financial penalties for the contractor: Finish the job by July 1, 2013, or pay the state $10,000 a day for every day it was late. Deloitte met the deadline.

“We decided our best option was to keep Deloitte on the project and added obligations on Deloitte to further protect the Commonwealth,’’ Goldstein said.

Deloitte declined to comment on whether the firm and the state nearly parted ways. Courtney Flaherty, a Deloitte spokeswoman, said in a statement, “This has been a complex and challenging project and that is why we have invested considerable time and resources into making sure UI Online is a quality system that meets the needs of the Commonwealth and the people it serves.’’

The modernization of the three-decade-old unemployment system has spanned two governors, three labor secretaries, and two vendors. Deloitte did not win the project originally, losing the bid to BearingPoint Inc. of McLean, Va. But when BearingPoint went bankrupt in 2009, Deloitte bought its public business and took over the Massachusetts contract.

Plans for the system overhaul began under Governor Mitt Romney, but the contract was awarded after Governor Deval Patrick entered office in 2007. State Auditor Suzanne Bump, then the state secretary of labor, signed the contract and secured $40 million in funding for the work — a feat she touts on her campaign website.

Bump, who as auditor acts as a watchdog for taxpayers, said she recalls little about the contract beyond landing the money to pay for it. Responding to Globe inquiries, she first distanced herself from the project, saying the state’s information technology department negotiated and managed the contract. But last week, Bump corrected herself, acknowledging in an interview that she was responsible for the contract and that she approved the recommendation to hire BearingPoint.

“I have no recollection of what was in that contract language,’’ Bump said. “But absolutely, this was done within the secretariat that I headed.’’

Bump left the Labor Department in December 2009 to run for auditor, just as the first phase of the system upgrade was launched to allow employers to file and pay unemployment taxes that finance benefits online. That rollout also ran into trouble, leaving many employers initially unable to access the system.

The terms of the contract approved by Bump were written to the benefit of the consultant at numerous points, according to Krigsman, the software analyst. For example, the contract gave the state only brief windows to check Deloitte’s work; if the state did not explicitly reject software pieces within 10 days of completion, then the work was automatically accepted.

Krigsman said 10 days is not enough time to review complicated software that must fit into a multiphase project. Under the contract, Deloitte also owns the software the state paid for, meaning Deloitte could sell it to other clients or keep it as its own intellectual property.

“Why would the state allow this?” Krigsman asked.

After Deloitte missed the first deadline in 2011, it initially sought $8 million to continue the project, but settled for $4 million, said Goldstein, who was appointed secretary by Patrick in early 2010.

In addition, the state agreed to pay Deloitte $236,000 for changes to the contract, such as adding language-recognition software, and another $1.7 million to provide support services after the launch of the system.

Finding a new firm to take over the contract would have been difficult, since only a few companies nationwide do this kind of work, Goldstein said.

She added that Deloitte was not entirely to blame for missing deadlines. When the worst of the recession hit in 2008 and 2009, the state Labor Department was delayed in providing certain data to Deloitte as it responded to the surge in jobless claims.

“Obviously, our priority was to make sure everyone who was unemployed and eligible for benefits received benefits,’’ Goldstein said.

In the end, Goldstein said, Deloitte delivered a system that is paying most claims — about 120,000 a week — and improving the state’s ability to root out fraud. The new system has detected $6.6 million in overpayments incurred by claimants dating back to 2005, although the state, by law, can’t recover such overpayments after a year, according to the Labor Department.

Goldstein characterized the problems as temporary bugs, which she said are not uncommon in new software. She said the state is working to eliminate them and negotiating with Deloitte to extend its 90-day warranty period another month, to the end of October, at no additional cost.

“What you bid for is not necessarily where you end up,’’ Goldstein said, “because it’s such a complex ongoing system.”